A “Successful Privatisation” Nationalised in Bolivia. Why?

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This article is based on an article in Poverty In Focus Number 18, August 2009 by by Degol Hailu, Rafael Osorio and Raquel Tsukada, International Policy Centre for Inclusive Growth (IPC-IG). It examines the reasons for the privatisation and then renationalisation of the water supply in urban Bolivia.

Contents

Background

Several developing countries corporatised and privatised their water provision on the grounds that the public sector lacked capacity to invest in maintenance and service expansion. The arguments supporting private sector participation in the provision of basic utilities are greater efficiency and a lower burden on public finances.


Privatisation, therefore, is believed to improve access to basic services through large investments in maintenance, network expansion and excellence in delivery (regularity, more connections, higher quality and so on). Governments would play a regulatory role, setting the expansion targets and controlling tariffs.


There is scepticism, however, about whether profit-oriented concessionaires would really invest in expanding coverage. Concessionaires will not always expand the water grid to poor areas due to lack of market incentives. Private utilities may not find it profitable to supply slums dwellers, for instance. The high incidence of illegal connections and the low income status of households may hinder cost recovery and discourage private investments. Moreover, there is a risk of agency capture, preventing governments from fulfilling their regulatory role.


Ascertaining whether privatisation improves access to utilities is an empirical matter. Bolivia provides an interesting example, having privatised the water utility in two important cities in the last decade. Water provision in La Paz and El Alto was privatised between 1997 and 2005. Private participation was effected through “concession contracts”.An international water consortium won the concession in those two cities. A 30-year contract (1997–2027) was granted for the operation and maintenance of, as well as investments in, water and sewerage provision. The upgraded infrastructure would remain under state ownership after the concession period. In the other two largest Bolivian cities, water provision remained cooperatively managed (Santa Cruz) and under public provision (Cochabamba).[1]


Political discontent and popular mobilisation, however, led to the early termination of the contracts in 2005. Why were the private concessions ended prematurely? When the concession contracts were drawn up, the government and the company agreed coverage targets: by 2001, installing 71,752 new water conections—roughly universal access in La Paz and 82 per cent coverage in El Alto. Yet the private provider failed to meet the agreed targets. In addition, upward adjustment of tariffs provoked public outrage. Eventually the unpopularity of cost recovery and the failure to meet legally binding targets led to the termination of the contract.


In what follows an empirical story is told, using data from national household surveys carried out by Bolivia’s Instituto Nacional de Estadistica (INE) between 1992 and 2005. We analyse access to water in the period before and after privatisation in the cities that privatised water provision and in those that did not. This allows us to determine how far the private provider attempted to push the limits of private provision and in the process how far, paradoxically, the poor benefited. Access to water is considered from three perspectives: delivery (coverage rate), equity (concentration of access) and affordability (water expenditure).

Delivery

The most fundamental indicator for assessing delivery is the water coverage rate—a headcount of households with in-house access to piped water. Access to the utility is closely related to income: connection fees are an entry barrier for the poor, and infrastructure (extended water grids) barely reaches slums or informal settlements. Hence the poorest quintiles of the population usually havemore limited access to piped water.

The analysis shows that in-house access to water has expanded more than proportionally in cities with private provision. In Cochabamba, access deteriorated in this period, while in Santa Cruz the coverage rate remained fairly constant (see Table 1). Furthermore, the results point to a positive relationship between having access to water and living in cities where the water utility was privatised.

Table 1: Piped Water Coverage Rate (%) in Four Bolivian Cities, Source: Authors’ calculations based on INE (* One year before privatisation. ** One year before renationalisation)
Table 1: Piped Water Coverage Rate (%) in Four Bolivian Cities, Source: Authors’ calculations based on INE (* One year before privatisation. ** One year before renationalisation)

Equity

Equity refers to providing all households with the same level of access to utilities despite their income status. A policymaker could redistribute wealth either by transferring physical assets from rich to poor households or by increasing provision to the poor more than proportionally. This latter approach seems to be reasonable in the case of utility infrastructure.


Access to piped water became more equitable (deconcentrated) under the private concessions (see Figure 1). In 2005, the difference in coverage rates between the poorest 20 per cent and the richest 20 per cent of the population fell from 30 to 4 percentage points in El Alto and from 15 to 4 percentage pointsin La Paz, compared to the period prior to privatisation. A pro-poor increase in access to water is especially noticeablein El Alto. Extending access to the poorest households in particular led to a sharp de-concentration in access to water.

Figure 1: Concentration of Access to Water in Selected Bolivian Cities, Source, Prepared by the authors based on household survey data released by INE
Figure 1: Concentration of Access to Water in Selected Bolivian Cities, Source, Prepared by the authors based on household survey data released by INE

An already high coverage rate in the upper quintiles of the population, however, does not necessarily imply an extension of the water supply to lower income areas. As mentioned earlier, private investment lacks market incentives to serve areas of low purchasing power. Hence the pro-poor increase in water access in La Paz and El Alto stemmed mainly from enforcement of the targets in the concession contract. The contracts explicitly demanded that the companies provide services to low income areas and, as stated, the target was to reach very high levels of coverage.

Affordability

Households should not spend more than 3 percent of their income on water bills. This is the acceptable affordability threshold. Although data on household water expenditure is not available for the period immediately before privatisation, we can compare expenditure over 2001 and 2005. Before the concessions in La Paz and El Alto, a 19 per cent upward adjustment in water prices was offered as an inducement to private companies. In 2001, the first revision of targets (scheduled every five years after the concession) allowed a further 12 per cent increase in water prices.


In a cross-city analysis, as expected, the poorest income quintiles reveal the highest incidence of households that cannot afford water. In 2001, the share of households that spent more than 3 per cent of their income on water bills was as high as 64 and 78 per cent for the poorest quintiles in non-privatised Cochabamba and Santa Cruz, respectively. Throughout the period, moreover, average household water expenditure, by income quintiles, was persistently higher in these cities than in those with privatised provision.


The burden of water expenditure was heaviest for poor households in Santa Cruz, which spent on average 8.8 per cent of their income on water in 2001, and 5.9 per cent in 2005. The poorest quintile in La Paz and Cochabamba also had a heavy burden, respectively spending an average of 4.7 and 4.6 percent of their income in 2001. In 2005, however, the poorest in La Paz could afford water, spending on average 2.6 per cent of income, while Cochabamba’s poorest households still spent above that threshold on water.

Concluding Remarks

From a delivery perspective, the network expanded more in the cities where provision had been privatised than in the others. Of course, we cannot tell whether this would have been the outcome in La Paz and El Alto if there had been no private intervention. Indeed, household income has risen over the years, which would naturally lead to an increase in access to water because of the affordability of connection fees. Nonetheless, an interesting feature of these cities is the large, pro-poor character of water services expansion. The explicit five-year expansion targets imposed by the concession contracts seem to have played a critical role in the high growth of new connections.


Apart from the expansion of access, theprice of water services and households’ capacity to afford water must also be taken into account. It is usually accepted that households would spend more on water if the utility were private. That is not necessarily what we have found in a cross-city comparison in the period of privatisation. It is true that, before privatisation, water tariffs are adjusted so as to offer an attractive cost recovery outlook for prospective firms. In this case, households suffer a one-off welfare loss. But quite a large proportion of poor households in the cities where the utility is public or cooperatively managed could not afford water either. Hence affordability seems to be a problem in these cities as well.


The chief message of this analysis is that privatisation contracts not always fare well in poor countries. The concessions in La Paz and El Alto failed. Though the poorest households had better access than before, price increases created a negative perception among consumers. Spending on infrastructure and service provision reaches the limits of profitability. The company could no longer exploit the ability to pay and engage in cost recovery. Furthermore, since the concessionaire did not comply with the number of new connections stipulated in the contract, the government felt compelled to demand termination of the contract.

References

  1. A caveat in the analysis arises from the fact that Cochabamba was privatised for a short period of less than a year in 1999 (see Hailu and Hunt, 2008). For a detailed escription of the empirical framework and limitations of the analysis, see Hailu et al. (2009).

Hailu, Degol and Portia Hunt. (2008). “Utility Provision: Contract Design in the Interest of the Poor”, IPC-IPG Policy Research Brief No. 10. International Policy Centre for Inclusive Growth. Brasilia.

Hailu, Degol, Rafael Osorio and Raquel Tsukada (2009). “Privatisation and Renationalisation: What Went Wrong in Bolivia’s Water Sector?” IPC-IG Working Paper No. 58. International Policy Centre for Inclusive Growth. Brasilia.

Kakwani, Nanak (1993). “Performance in Living Standards: An International Comparison”, Journal of Development Economics 41, pp. 307–336.

See also

Privatisation in Deep Water?

Private Sector Participation and Access to Water Supply in Brazil

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